BIR Ruling

March 8, 1972 Amparado, Ong Yiu, Sabarre and Associates Certified Public Accountants Suite 201 Emerald Building D. Jakosalem Street Cebu City Gentlemen : This refers to your letter dated March 22, 1971 requesting exemption of the Cebu Eastern College, Cebu City, from the payment of income tax and filing of the corresponding income tax return under Section 27(e) of the Tax Code. In reply, I have the honor to inform you as follows: Investigation disclosed that the Cebu Eastern College (hereinafter referred to as the College) is a non-stock and non-profit educational corporation duly registered with the Securities and Exchange Commission; that the purpose for which it was formed is to open, establish, maintain, own, operate, or otherwise conduct a private school of primary, intermediate, secondary and collegiate standing, and business schools within the City of Cebu and to issue certificates, diplomas and degrees; that the College shall be non-sectarian and shall be open to all nationalities, Filipinos and aliens alike without race discriminations; that the College shall be governed by a board of fifteen (15) trustees who shall be residents of the City of Cebu and at least thirty (30) years of age; that income of the College is derived mainly from the annual contribution and donations of its members and other people, tuition fees, matriculation and entrance fees paid by the students enrolled in the School and which resources are used to pay for the salaries of teachers and other school officials, the acquisition of school facilities and the maintenance of such facilities. The Articles of Incorporation do not contain any provision as to whom and how the assets of the College will be distributed upon its dissolution. Corporation enumerated in Section 27(e) of the Tax Code shall be exempt from income tax if; (l) they are organized and operated for educational purposes. However, in its actual operation, the College indubitably fails to meet the non-profit requirement. It is to be noted that the net profits of a corporation inure to the benefit of the members or stockholders not only by way of cash or stock dividends but also thru the accumulation of profits or additional capital, or the investment thereof in additional assets, and every increase in surplus, capital or assets will result in the corresponding increase in value of their shares or interest in the corporation. Considering that the profits will be used in the acquisition and maintenance of additional School facilities or invested in permanent assets of the College, which assets will most likely upon its liquidation be distributed to the incorporators or members, it is obvious that the net income of the College will somehow inure to the benefit of its members or stockholders. It is for this reason that private educational institutions like the Cebu Eastern College are subject to income tax on their net income although no dividends are declared and distributed during the year. (Collector of Internal Revenue vs. University of the Visayas, G.R. No. L-13554, October 30, 1964) In view of the foregoing considerations, this Office is of the opinion and so holds that the Cebu Eastern College is not an exempt organization within the purview of Section 27(e) of the Tax Code and is, therefore, subject to the corporate income tax imposed by Section 24 of the Tax Code, as amended. cdta Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue